As an attorney, Rick has seen many of the things that can go wrong with private lending. For example, after one local investor passed away, it was discovered that he had as many as seven liens on a single investment property and each lender thought they had a first lien on the property. Another lender received a mortgage from an investor but did not discover until after the property was sold that it was never recorded. Other lenders have dealt with issues such as investors that took the funds and never did work on the property or have lent money secured by liens on properties that were never owned by the investor because of a fraudulent lien in the chain of title.
Many of these issues can be avoided by closing your private lending transaction at a title company and using an attorney early on in the process to help draft your lending documents.
An attorney can ensure that the lending agreements, including the promissory note and mortgage or deed of trust are fully enforceable and protect the interests of the lender. Moreover, a title company can conduct a search to determine that there are no prior liens and issue a title policy to the lender that protects it from future title issues.
Many private investors do not recognize that they can obtain lender’s policies and assume they are just limited to large banks. Others over estimate the cost of these policies. A title policy for a property valued at less than $500,000 is usually less than $1,000. Furthermore, the costs of this policy can be passed on to the borrower either as cash due at closing or by adding on to the principal balance on the loan to the borrower.
There is a reason that large banks and mortgage companies require lender’s policies on every one of their mortgages — it is because it protects the lender’s interest for a relative low cost. The argument for such a policy for a private lender is even stronger as a private lender often has less ability to absorb a significant loss than a large national lender. It is for this reason that we strongly recommend using a title company and obtaining a title policy for all of your private lending transactions.
Drafting Private Lending Documents
If you would like us to assist with creating your appropriate private lending documents, we would be happy to do so. We charge a flat rate for drafting these documents, and you can learn more about retaining us to draft your contracts on our contract drafting webpage.
Guidance for Private Lenders
Additionally, we offer a monthly subscription service that provides access to unlimited scheduled phone calls with an attorney. These calls can be invaluable for a wholesaler as he or she wades through the legal challenges of this investment strategy. You can learn more about this program by going to our Guarded Pockets™ webpage.